Education Planning - Types of Financial Aid and College Loans

Grants and scholarships - Grants do not have to be paid back and are awarded by federal and state governments and individual institutions. Scholarships are usually based on merit.

Pell Grant - A federal grant that provides up to $2,340 a year. Awarded to the neediest students.

Supplemental Educational Opportunity Grant - A federal grant program for low-income students. The government distributes funds to individual schools, which are responsible for awarding grants of up to $4,000 per year.

Work - Helps pay for books, supplies and personal expenses. Includes Work-Study, a federal program providing part-time employment on campus or in surrounding communities.

Loans - Most financial aid comes in the form of loans that must be repaid. Includes both government-sponsored loans and private loans for students and parents.

II. College LoansThere are a variety of loan programs to assist families with covering higher education expenses. Some are need-based, others are not. Need-based loans usually have better terms and should be considered first.

Federal student loans - There are three main types of federal student loans:

Perkins Loans - Need-based loans awarded to students with the highest need. Features very low interest rate. Student not required to make any loan payments while in school.

Subsidized Stafford Loans - Need-based loans, also with very low interest rates. The federal government pays the interest on the loan while child is in school and during six-month grace period following graduation.

Unsubsidized Stafford Loans - Not based on financial need. Student is responsible for paying interest on the loan that accrues during in-school period. Student may pay interest while in school or have the interest added to the principal upon graduation.

Other student loan options

Private student loans - Many lenders offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than federal need-based loans.

College-sponsored loans - Some colleges operate their own loan funds. Interest rates may be lower than federal student loans.

Parent loans

Federal PLUS Loan - Largest source of parent loans. Parents can borrow up to the full cost of attendance, minus any aid received. Repayment starts 60 days after funds are sent to the school.

Private parent loans - Many lenders offer private education loans to parents. They usually come with a higher interest rate than the PLUS Loan.

Consolidation loan - A loan that combines several student loans into one, larger loan from a single lender. The interest rate may be lower than on the underlying loans. The total monthly payment may be lowered by extending the term of the loan. A term extension, however, will increase the total interest paid.Introduction